Republicans block bankruptcy change; will walkaways increase?

By Jack, on February 29th, 2008

Democrats have been trying to change the bankruptcy law so that judges could “cram down” mortgage amounts or terms to levels that would be affordable for the person filing bankruptcy. By threatening filibuster, Republicans in Senate have prevented that bill from passing.

In a statement that reminds one of the double speak in the book “1984”, the Republicans claim that the bill would bail out the banks. That’s ridiculous. The bill would make the banks swallow their losses, which is why the Republicans oppose it. Homeowners are the ones who would be bailed out.

Ironically, banks will now foreclose, throw out the homeowners, emptying the house for vandals to strip, and probably ending up with a shell that will have to be demolished. This is not worse for them than the option they oppose.

Another result of this will likely be more “walkaways.” With an estimated $3 trillion in mortgages — almost one third of all the mortgages in the United States — heading for “negative equity” (mortgage is higher than home value) by the end of the year, there is strong incentive for homeowners who cannot afford their mortgage to cut their losses and simply walk away from the house.

Technically when this happens, the borrower is still liable for the balance due on the mortgage when the house is sold by the lender, but lenders know that they are going have a tough time collecting on that, so they usually (but not always) end up taking the loss themselves.

The consequences to your credit may not be as bad as you think. People who go through foreclosure can often get a new loan within as little as two years.